RBI reduces policy rate. Will your loan rates also go down?
INVESTMENT MANTRA Expect further cuts in FD rates by banks; if you are looking to invest in mutual funds, focus on shortterm funds
MUMBAI: As expected on August 2, in the third bi-monthly monetary policy statement, the Reserve Bank of India cut the policy rate by 25 basis points (bps) from 6.25% to 6%. One basis point is one-hundredth of a percentage point. A look at what the policy announcement means for your money and what you should do.
LENDING, DEPOSIT RATE
The RBI seems to be unhappy with the current benchmark lending rate—marginal cost of funds-based lending rate (MCLR). During the policy announcement, RBI deputy governor Viral Acharya said, “The experience with the MCLR system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory even though it has been an advance over the earlier base rate system.”
The central bank is all set to review this.
This is not the first time that the RBI is considering a review. All floating rate loans taken after April 2016 are linked to MCLR. Prior to MC LR, floating rate loans were linked to the base rate and before that to benchmark prime lending rate. There is a possibility that borrowers will soon see a new benchmark lending rate that will replace MC LR. However, this won’t happen immediately.
But what does a 25 bps cut mean for your existing floating rate loans on MCLR? “From a broader perspective, this 25 bps cut has already been priced in. Because if you look at the way banks have moved their deposit and lending rates, banks in away have priced in this drop. There maybe a marginal movement but I won’t expect any major movement ,” said Sh antiEk am bar am, president-consumer banking, Kotak Ma hind ra Bank Ltd. Analysts say that banks are likely to cut lending rates linked to MC LR further. If you are looking to take a home loan, compare rates in the market and also factor in other charges linked to the loans.
Meanwhile, banks have been cutting deposit rates. Recently, SBI cut savings account deposit rate to 3.50% per annum. Banks including ICICI Bank Ltd and Lakshmi Vilas Bank have cut fixed deposit rates.
“Banks have been dropping deposit rates, if you see in the last few months. Liquidity and demand supply will be the major factors that will come into play,” said Ekam baram. You can expect further cuts in fixed deposit rates.
DEBT
Mutual funds as well as debt funds have been factoring in this rate cut too. People investing now would do well to focus on shortterm funds, according to Lakshmi Iyer, chief investment officer–debt, and head of products, Kotak Mahindra Asset Management Co. Ltd. But don’ t expect high returns from liquid funds. “Expecting high returns from duration funds from here on may not be a good idea. Steady returns from income-accrual funds is the way togo ,” said Vidya Bala, head of mutual fund research, Fundsindia.com.